Dual-Class Structures: Does the Market Already Have a Fix?

  • United States Image

Aug 14, 2017

On August 14, 2017, following the recent decision of major indices to exclude “dual-class” companies that offer minimal voting rights to public shareholders, the debate about dual-class companies continues to rage – but this recent study suggests that the market may already have a solution, in the form of investors’ demand for a “risk premium” for these stocks.

Here’s the abstract of the study:

Critics advocate eliminating dual class shares. We find that founding families control 89% of dual class firms, potentially confounding economic inferences regarding limited voting shares. To identify the impact of dual class structures on outside shareholders, we examine stock price returns; finding that dual-class family firms earn excess returns of 350 basis points more per year than the benchmark.

Institutional owners garner a disproportionate fraction of these returns by holding over 97% of their floated shares. Overall, we show that investors demand a risk premium for holding dual-class family firms, suggesting a market-driven resolution to concerns about limited voting shares.

If the study’s right, these above-market returns may go a long way to explaining why institutions continue to throw money into these stocks.

Review the study on the Social Science Research Network's website.

Correction list for hyphenation

These words serve as exceptions. Once entered, they are only hyphenated at the specified hyphenation points. Each word should be on a separate line.